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Tax Insurance

We leverage our deep expertise to guide you through the intricacies of tax law and regulation, ensuring that you have the knowledge and support necessary to make informed decisions and effectively manage your tax risks.
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In M&A transactions, the identification of a tax issue can often lead to complications and disagreements between sellers and buyers depending on the severity and magnitude of the issue. By utilizing tax liability insurance, parties involved in an M&A transaction can seek to isolate the tax issue and transfer the associated risk to an insurance provider. This not only removes the obstacle to executing the transaction but also eliminates the need for the seller to provide a warranty or specific indemnity related to the tax issue. Likewise, it prevents the buyer from using the tax issue as a bargaining chip in price negotiations.

Beyond M&A transactions, tax insurance has broad applicability in various situations. It can provide certainty regarding a tax position in scenarios such as restructuring, insolvent sales, and the release of balance sheet provisions.

With tax liability insurance, taxpayers can navigate complex tax issues with greater confidence, promoting the smooth execution of transactions and minimizing financial risks.

Why should you consider purchasing tax insurance?

Tax insurance, also known as tax indemnity insurance or tax opinion insurance, serves several important purposes in various transactions:

Protection against tax challenges

Tax insurance provides protection in case a taxing authority challenges a historical tax position taken by a target entity. This coverage applies when the buyer assumes the tax position or when the seller retains it through an indemnity.

Ensuring intended tax structure

Tax insurance ensures that a specific tax structure used in a transaction achieves its intended effect. This coverage provides peace of mind by safeguarding against unforeseen complications.

Mitigating uncertainty

Tax insurance offers protection when there is no clear guidance on a specific tax issue and a party is unwilling to accept the associated tax exposure. This coverage helps manage risk and provides financial security in uncertain tax situations.

In addition to its use in M&A transactions, tax insurance can be obtained on many tax positions as part of a company’s ongoing operations. This coverage protects against potential tax authority reviews.

Key features of tax insurance

A tax insurance policy typically provides coverage for a period of seven years. It includes protection against tax liabilities, fines and penalties, interest, legal contest costs, and tax gross-up. The policy can cover various forms of direct and indirect taxation, such as:

  • Corporate income tax
  • Personal income tax
  • Capital gains tax
  • Property tax
  • Sales and use/value-added tax
  • Investment tax credits and production tax credits

Situations in which to use tax insurance:

Tax insurance can provide coverage for financial losses related to known tax risks that may be contested after the transaction is closed. It offers benefits to both the buyer (such as supplementing R&W/W&I insurance and providing recourse when no seller indemnity protects key relationships/employees, etc.) and the seller (such as reducing escrows or contingencies and maximizing indemnification).

Tax insurance can provide coverage for financial losses resulting from tax risks throughout the corporate lifecycle, including M&A activity and return insurance. It can help mitigate risks in situations where adverse decisions can have catastrophic consequences, such as tax restructuring, refinancing, and internal tax planning.

Tax insurance can provide coverage for financial losses resulting from successful challenges by tax authorities to investment and production tax credits in renewable energy (for example, wind, solar, and carbon sequestration) and other related requirements (for example, prevailing wage and apprenticeship, energy community, and domestic content). It offers benefits, such as transferring risks to third parties allowing for more business growth and providing credit support/enhancement for financing and securitizations.

Tax insurance can provide coverage for financial losses resulting from tax risks in the context of family office asset management. It is generally driven by tax planning and offers protection from risks or historical exposures. It can also address issues impacting risk flow to new versus former limited partners (LPs).

Tax insurance in this context is similar to certain aspects of family office asset management, providing protection for new risks or historical exposures driven by tax planning at any time. It can be particularly valuable in scenarios where there is large potential downside if the IRS or other taxing authority were to challenge a tax position. Tax insurance may be utilized to address the following scenarios:

  • Tax restructuring in light of family dynamics or an error in an estate plan.
  • Residency issues for decedents.
  • Reformation of a marital trust to reduce a party’s share without constituting a taxable gift to other beneficiaries.
  • Severance of a marital trust does not disallow the estate tax marital deduction on Form 706.
  • Addressing generation skipping transfer (or GST) tax issues.
  • Resolving tax basis issues.
  • Distributions from a marital trust for an individual’s health, maintenance, and support are not treated as part of the commutation of a trust or as any other taxable disposition.
  • Commutation of a marital trust does not adversely affect the estate tax material deduction taken on Form 706.

Tax insurance policies are most effective for addressing uncertainty in legal outcome concerning a discrete tax issue. They are not meant to cover all potential tax consequences or unknown risks associated with estate planning.

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Please note that Marsh PB Co., Ltd and Marsh McLennan are not engaged by nor involved in any manner with Bonus Ranch and its promotion, and has not placed any insurance for nor insured any of its businesses or operations. Marsh as a licensed insurance broker will not request customers to make payment via non-standard methods, such as the transfer of money to any individual’s bank account.